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Indiana’s retail lobby is pushing the state to follow a growing number of states passing laws to require online retailers to collect sales tax from customers.

It’s a policy change that some say could net Indiana close to $300 million per year in much-needed revenue and create a fairer competitive environment for brick-and-mortar stores.

But while the concept has support among lawmakers, key fiscal architects are hesitant to weave such a policy into the two-year, $28 billion budget bill, which has passed the House and is in the Senate.

“The real solution is to get to a uniform system” across the country, says Sen. Luke Kenley.

That’s partly because state economic-development officials four years ago made a commitment to Amazon.com that they wouldn’t push to collect sales tax from the company. Indiana officials dangled the incentive to get the online retailer to locate its first warehouse in Indiana.

Under current state law, companies with a physical retail presence in Indiana must collect the state’s 7-percent sales tax. That includes firms such as Wal-Mart or Best Buy, which sell online as well as have physical store locations, but excludes operations such as Amazon or Overstock.com, which have distribution centers in the state.

The Indiana Retail Council wants the Legislature to require Internet retailers with any kind of physical presence in the state to collect sales taxes. Companies with affiliates, or those who agree to promote the retailer’s products on their websites in exchange for a cut of sales revenue, residing in Indiana also would be subject to the tax.

It’s similar to the approach taken by states such as Illinois, New York and North Carolina and being debated in places such as California. The push has been driven in large part by the growing need to collect tax revenue in light of tight state budgets.

“At a time when the state is wrestling to put together a biennial budget and you’ve got all kinds of programs the Legislature wants to fund, [the money] would go a long way,” said Grant Monahan, the Indiana Retail Council president, who has been lobbying members of the Senate Appropriations Committee who are now dealing with the budget. “The policy puts my retailers at a 7-percent disadvantage.”

Efforts in other states, however, haven’t been foolproof, and some Indiana lawmakers say the problem should be addressed at a federal level, rather than state by state.

“It’s a growing concern,” said Rep. Jeff Espich, the Republican chairman of the House’s Ways and Means Committee. “I don’t think there’s any answer short of Congress taking action.”

Agreement with Amazon

The state’s agreement with Amazon makes it thornier for lawmakers to pursue the retail council’s proposed solution.

A state law used to require companies that didn’t maintain a place of business in Indiana but had affiliated locations, such as distribution centers, to obtain a retail merchant’s certificate in order to sell goods to Indiana residents. That subjects the retailer to the same duties as an in-state merchant, including tax collections on products used in Indiana.

But that law was repealed in 2007 as a way to lure Amazon to locate warehouses here, according to lawmakers and economic development officials.

At that time, state leaders also agreed verbally they wouldn’t pursue a future change in the law.

Indiana Commerce Secretary Mitch Roob said the motivation for striking such a deal was to attract Amazon jobs. Seattle-based Amazon.com did not respond to a phone or e-mail request for comment.

Amazon opened its first facility in Munster in 2007, but that site, which employed about 100, closed in 2009. The company currently has two Indiana warehouses—one in Whitestown and one in Plainfield. Roob said he didn’t know how many they employed, but press releases announcing the facilities touted that they were anticipated to bring a combined 1,500 jobs.

If the state pursued a law requiring Amazon to pay sales tax, Roob said, it would cause the company to move its locations elsewhere, as Amazon has done in other states.

“If you change the law and force them to collect sales tax on Indiana-based sales, they would simply move,” Roob said. “Then the jobs would go away, and the sales tax wouldn’t be collected, anyway.”

Sen. Luke Kenley, who heads the Senate’s Appropriations Committee and has advocated for online retailers paying sales tax at a national level, said he agreed to respect the state’s arrangement with Amazon. That’s part of why he’s not pushing to amend such a measure in the budget this year.

But Kenley also believes a state law isn’t a complete answer—and he wouldn’t want his fellow lawmakers to believe that if they passed a law, it would entirely solve the problem.

“The real solution,” Kenley said, “is to get to a uniform system” across the country.

Federal solution

Crafting an effective state-level solution has been challenging.

Amazon sued New York over enforcement of its law, and Amazon and similar online retailers responded to a law passed last month in Illinois by ceasing to pay commissions to affiliates in the state.

The company did a similar thing in North Carolina, Hawaii and Rhode Island, which have made a push to collect sales taxes from online retailers. And earlier this year, Amazon announced it would close a Texas distribution facility after the state sent the company a bill for $269 million in uncollected sales tax.

Don Bruce, a University of Tennessee economist who has studied the revenue loss associated with online sales tax exemptions, said it’s still too early to tell whether the laws have had an impact on state revenue.

Ultimately, the success of state laws, some experts say, will depend on how courts respond to legal challenges brought by Amazon.

A 1992 Supreme Court ruling determined that a state couldn’t require a seller without a physical presence there to collect tax on sales into the state.

The issue that states face in current legal battles is how closely the physical presence they cite—in the form of warehouses or those with website links to Amazon and other retailers—can be tied to those companies, said Walter Hellerstein, a University of Georgia law professor who specializes in taxation law.

For example, warehouses could be placed under a subsidiary of the company, a move that, Hellerstein says, “flies in the face of good tax policy.”

These kinds of complications have led some Indiana lawmakers to say the problem should be left up to their federal counterparts.

A bill expected to be introduced in Congress this year, dubbed the Main Street Fairness Act, would adopt an agreement made by 23 states to simplify state sales tax administration and allow states partaking in the agreement to collect the taxes.

The challenge in passing it will be overcoming the perception that it’s a tax increase, particularly at a time budget fights have taken center stage in Washington. But Bruce said it would make sense for Congress to act on it.

“This is an easy win for Congress because we’re still climbing out of a recession and there have been large-scale efforts to support state government,” Bruce said. “Here’s a chance for the federal government to help states help themselves in a way that doesn’t add to the federal deficit.”

But some Indiana lawmakers—like the retail council—don’t want to wait for the federal government to provide a solution.

Rep. Ed DeLaney, D-Indianapolis, introduced an amendment in the House budget bill that would require the state to publish informal oral agreements such as the arrangement with Amazon.

The measure, which failed, was designed mostly to call attention to the issue and provide transparency.

But DeLaney—who as a member of the minority party is in a weak position to champion legislation—said he thinks the time is ripe for lawmakers to take action on an enforcement measure.

“I think there will be a national trend in the direction of collecting it—the question is, how long do we wait?” DeLaney said. “The states don’t have to go to sleep. We’re allowed to protect our interests.”•

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On Tuesday, April 24 IBJ & Indiana University will host Education-to-Employment (E2E) Convergence, a panel discussion focused on how Indiana can build a talent strategy around a more highly educated workforce. E2E will identify examples of successful partnerships to better integrate college graduates into our workforce from around the state. Register today.